How supply chain superheroes have kept world trade flowing

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All hail international supply chain managers, the heroes of the world economy. The resilience of the value networks they guard and nurture has done a splendid job of defying widespread defeatism about globalisation these past few years. The world trading system in goods has manifestly failed to collapse; global growth has recovered.

The pandemic forced lockdowns that kept consumers and retail workers at home, and Covid-19, Russia’s full-scale invasion of Ukraine and the Houthi attacks in the Red Sea interrupted production and snarled up shipping. And, of course, rising trade and geopolitical tensions have induced friction via tariffs and export restrictions, especially from the US.

At a global macro level these shocks can look existential, and determined efforts by governments to decouple economies through trade and technological barriers could certainly have mounting effects.

But at company level, such shocks simply create sets of problems to solve, preferably via ex-ante resilience to disruption or, failing that, by finding next-best options to the status quo. Supply-chain managers are called upon to keep the universe in order — a logistics equivalent of Doctor Who, though travelling in space rather than time and across borders rather than planets.

The sharp drop in container traffic through the Suez Canal, for instance, has certainly been bad news for small Middle Eastern companies shipping to the Mediterranean. For large-scale Asia-Europe trade, going round Africa has lengthened journey times and costs but in the aggregate proved less than disastrous.

An obvious example of a multinational dependent on finely tuned supply chains is the Swedish flat-pack furniture giant Ikea, which operates in 63 countries and territories through a franchise system. Ikea took an unpleasant knock from the combination of Covid and the war in Ukraine, forcing it to raise prices and take a hit on profits. But since 2022 it has been bringing prices down again.

To some extent, the Ikea model is deliberately insulated from supply chain shocks. Unlike garments or electronics, it is not a long-distance labour-cost arbitrage business producing cheaply in Asia and selling in Europe and the US. Certainly, there were sometimes severe problems with stock levels as an immediate result of the pandemic. But the fundamental pattern of the business endured.

Jon Abrahamsson Ring, chief executive of Inter Ikea, which owns the Ikea brand and designs the products, told me: “Europe is circa 70 per cent of our sales, and about 70 per cent of that is produced in Europe itself.” Heavily automated production offsets more expensive European labour and makes it more resilient to worker shortages.

One of the world’s biggest users of natural wood, Ikea gets most of it from Poland, the Baltic countries and Sweden. The Ukraine war cut off the then 11 per cent of its total wood supply that came from Russia and Belarus, but the company bought more from elsewhere and changed the mix of woods it uses.

It carries a relatively narrow and globally uniform range of product lines, reducing the complexity of making changes. Rather than buying products on the spot market, it has about 750 direct suppliers, with whom it signs long-term contracts. It kept some of these afloat by extending finance when they were hit by the Covid shock.

Ikea’s Asia-Pacific operation also sources mainly in that region. In its chief expansion market, the Americas, only 10 per cent of its products are produced locally, but it is working hard to increase that. Local production will also have the benefit of protecting its value network from renewed trade tensions, for example if the US pushes up tariffs yet further on imports from China or Europe. But Ring says the company would be sourcing regionally anyway.

He says: “We continually look at our supply chain in terms of what we need to produce globally, regionally and locally, and that didn’t shift very much as a result of Covid or the Ukraine conflict.” To the extent that Ikea does ship products long distances, it holds higher inventory to cope with disruptions such as the Suez blockage: again, annoying but not fatal.

On the other hand, being heavily dependent on bricks-and-mortar (or steel-and-concrete) outlets, Ikea was hit hard by the effect of the Covid lockdowns on retailing. There the model was forced to change. Ring says: “We did see a big blip in the supply chain when Covid hit. Availability went down and we closed 300-plus stores in a couple of weeks. But business shifted to ecommerce, from 5 per cent of total sales to 25 per cent, and hasn’t moved back since.”

Ikea has ridden a shock, resumed expansion and made permanent adaptations when needed. Its problems are not identical to those of other multinationals, and in some ways the nature of the business makes it less vulnerable to disruptions than most. But still, its experience is part of a worldwide phenomenon where flexibility at company level, repeated across thousands of businesses, can make an aggregate global shock less damaging than it first appears.

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